Tax, tax, and misunderstandings: They could be why many startups fail in just 2 years

Misunderstandings about tax obligations could be one of the reasons many startups fail within the first two years of operation, and New business owners should also have to show they understand the requirements before they begin.

That’s according to NexGen Group director Vinay Ishwar, who says he has lost count of how many business owners thought their first year of trading was tax free.

NexGen Group is an Auckland-based accounting and business advisory firm.

Ishwar says it’s no coincidence that the two-year timing for failure is the time when new business owners get hit with GST, terminal tax from their first business year, and provisional tax for the year ahead.

“A double ACC levy is the cherry on top,” he adds.

But he doesn’t blame IRD for the misunderstandings.

“Too many business startup owners try to do it all on their own, so they rely on their own assumptions and interpretations, or what their mates tell them. We also see a lot of people who simply believe that if they ‘build it, the customers will come’ – blind faith and taxes are not a recipe for success.”

He adds that too many startup owners go into business without consulting mentors, business coaches, or accountants.

They also don’t have a business plan – and they don’t do their market research. Ishwar says failure is almost inevitable.

“More than 75% of new clients who come through our doors already started the company, or left their job, or opened a shop, and they haven’t registered for GST.”

To prevent these misunderstandings from happening, Ishwar says there should be a requirement to submit a one-page business plan as part of the company registration process – and a little education would also help.

“Something simple – like going for your learner’s licence – at no additional cost, would alert startup entrepreneurs to their tax and ACC levy obligations. Nobody reads brochures and flyers and the wording needs to be improved anyway.”

He also says startups are often unprepared for employment contracts.

“Employment restraints of trade preclude a lot of people from doing the necessary preparation – like planning and research – ahead of launch. And then when they leave, they have to hit the road running because they have to feed the family; they’re not thinking about taxes and GST at that stage,” says Iswar.

“Sometimes the business takes time to start earning at first, so they’re living on savings and spending everything they earn. It becomes a habit. Then suddenly – for many types of businesses in New Zealand – everything slows over December and January, and they realise that they really only have ten months of the year to trade.”

If you’re interested in starting a business, Ishwar says there are six steps to follow:

1. Consult an accountant, business coach and or mentor to understand your tax and other compliance obligations.
2. Write a one-page business plan listing your goals, vision, a simple budget and how you intend to find customers.
3. Get an understanding of how shareholder structure can impact your tax obligations.
4. Invest in accounting software.
5. Research your target market.
6. Start saving a portion of your earnings for taxes now.

“Do those things and you're already ahead of 95% of other business startups. Being good at what you do is not the same as being good at business – you have to be good at both to succeed,” he concludes.